Category Archives for Money

In the 90s the internet boom happened. It was two things: a revolution in the way we create, organise and share information, and a speculative investment mania dubbed the dot com bubble. One of those things survived and grew, the other popped.

Right now the bitcoin boom is happening. It is two things: a revolution in the way we transfer and store money, and a speculative investment mania yet to be dubbed. Predicting the long term value of a bitcoin is a mug’s game. If/when the bubble pops it won’t be the end though, just like with the dot com bubble.

The more interesting part of bitcoin is the part that will endure no matter what happens to the price. Bitcoin is a decentralised system of transferring money. No central authority is in control, no one can arbitrarily decide that an organisation is illegal and cut off payments. This is both a good and a bad thing depending on the organisation and your personal politics; for example I think that bypassing the financial blockade on wikileaks is great, but that bypassing local gambling regulations and making money off of problem gamblers is bad. Either way it’s certainly interesting, because it’s very hard to stop it. Regulation and illegality could make using bitcoin inconvenient, but it’d probably still be more convenient than using cash for the same purposes. Bitcoins are like cash you can send overseas as quickly and easily as an email.

Bitcoin also cuts out the financial middle-men to a degree. There are no banks, paypal, or visa networks to take their cut. There are some small fees to keep the network going (currently less than 10c per transaction) which get paid to the distributed network of people verifying all these transactions to make sure no one double spends their bitcoin balance. There are payment processors like bitpay which take their cut in return for making it easy for merchants to accept bitcoin, but using them is entirely optional.

In addition to just cheaper transactions, there are some applications where I would find bitcoin more useful than traditional currency/payment processors. Sending money to relatives overseas? Want to buy stuff from overseas to avoid the ridiculous regional pricing, but don’t have a US based credit card? The other day I paid for a couple of coffees at a nearby cafe with bitcoin, and was surprised at how quick and easy it was. Visa paywave still beats it, but it’s comparable to counting coins or pin/sign credit card transactions and given that bitcoin point of sale systems are still in their infancy this will no doubt improve. I’d be sceptical when people say that bitcoin is going take over a good proportion of the payment processing / money sending market, but I think it will at least get a tiny slice of something. Until an even better alternative is invented of course.

Finally the USA style libertarians jumping on the bitcoin bandwagon will tell you that all governments will eventually print so much fiat money that it will be devalued, or just go the way of Cyprus and freeze everyone’s bank accounts. By contrast they say that bitcoin is deflationary (there can only ever be 21 million of them “printed”) and they can’t be seized as long as you keep the password to yourself. Sure bitcoin is deflationary in the sense that supply is limited, but that doesn’t mean the value can never drop; the other side of that equation, demand, is completely untethered. And while no one can seize your bitcoins, the downside of no centrally trusted bank / government is that you might lose your bitcoins to hackers, hard drive failure, forgetfulness, death or the dust bin and you’ll never get them back.

Early that year before Google’s IPO, Senior Vice President Jonathan Rosenberg realized that he was about to spawn thousands of impetuous young millionaires, and feared that they might be preyed upon by the wealth management industry. After consulting with founders Sergey Brin, Larry Page and CEO Eric Schmidt, he planned a series of in-house investment seminars to educate their soon-to-be wealthy colleagues. In the spirit of the “don’t be evil” Google ethos, management decided to invest in the preparation of their employees for the coming onslaught of Wall Street pros hawking their wares.

Google, being the best at what they do, felt that their staff deserved the best that the money management industry had to offer. In turn they brought in Nobel Laureate and Stanford University sage William Sharpe, Princeton economics professor and former dean of the Yale School of Management’s Burton Malkiel, and revolutionary Vanguard founder and white-hat “Saint Jack”, more commonly known as John Bogle.

What did these world-renowned financial minds have to say? A simple but hard to accept truth – active money management doesn’t work. Instead, put your money into low-cost, diversified index funds and get back to the real business of life and to building Google into a world-class company. Over time and after fees and taxes, you will end up with more money and a better life.

Sound advice, but ethical investing is a whole different game. What if you don’t want to give money (capital) to the oil industry? Or to companies who profit on sweatshop exploitation? Or to weapons manufacturers? Index funds do this, and in order to avoid it you have to go back to active management. The whole benefit to an index fund is that a monkey can run it, so the operating costs (and therefore your fees) are as low as they get. With active management your fees are bound to go up.

Admittedly, those fees are probably more than worth paying for. The audits that (I assume) ethical investment funds engage in not only ensure your dollars aren’t contributing to global warming/war/exploitation, but might encourage other companies to choose more ethical business practices. They avoid getting on the “ethical blacklist” and can attract more investment.

Of course being the hacker that I am, I wonder if we can get the best of both worlds? Can we get low fees and ethical investment?

What if we crowd source the audits? We’d have an army of volunteers who don’t need to be paid anything. You could start slowly. Set up the fund as a normal index fund, spreading risk around by just buying the whole market. Everybody who buys into the fund can nominate a share, e.g. Lockheed Martin (NYSE: LMT), for audit. A wiki article goes up on the fund’s website, people can edit it and add evidence for / against the company’s ethical practices (with supporting evidence of course). After a certain amount of time or votes the company will get blacklisted (or not) based on the majority of the votes.